On February 23, 2017, the newly confirmed Treasury Secretary Steve Mnuchin called for the first Financial Stability Oversight Council (FSOC) meeting to be scheduled for March 2, 2017. The preliminary agenda was to include “an update on the annual re-evaluation of the designation of a non-bank financial company” according to the announcement.1 Under the Dodd-Frank Act, the FSOC has the authority to designate insurance companies and other non-banking firms as “Systemically Important Financial Institutions” (SIFIs), a label indicating that they are considered “too big to fail,” thus requiring additional oversight. Congressional Republicans are taking aim at the regulatory process, and in a report released on February 28, 2017, staff members of the House Financial Services Committee described the current process for identifying SIFIs as “arbitrary and inconsistent” and so confusing to banks, insurance companies and other financial firms.2

Background

The FSOC is a US federal government organization established by Title I of the Dodd-Frank Act. Chaired by the Secretary of the Treasury, the Council has ten voting members, including the Chair of the Federal Reserve, Chairs of the SEC (Securities and Exchange Commission), FDIC (Federal Deposit Insurance Corporation), OCC (Office of the Comptroller of the Currency) and CFTC (Commodity Futures Trading Commission), and the Director of the CFPB (Consumer Financial Protection Bureau).3 In 2011, the FSOC published a list of Global Systemically Important Financial Institutions (G-SIFIs), and together with the Basel Committee on Banking Supervision, identified factors for assessing whether an institution is systemically important, including:4

its size

degree of complexity

extent of interconnectedness

lack of readily available substitutes for the financial infrastructure it provides

its global, cross jurisdictional activity

The concept of a SIFI in the US extends well beyond the traditional banks, and so is included in the Non-bank SIFI designation, which include large hedge funds, large insurance companies, and Systemically Important Financial Market Utilities (SIFMUs), such as Exchanges and Clearing Houses.5 SIFMU designation places these entities under enhanced regulatory oversight by the Federal Reserve Board, SEC, and CFTC; and brings them under the FDIC’s resolution authority, whereby a SIFMU can be placed into FDIC receivership vs reorganizing or liquidating under the supervision of a bankruptcy court.6

The FSOC’s most potent power is in its designation of SIFIs and SIFMUs, which it has used to subject large banks and non-bank firms to stringent Federal Reserve regulations. In 2014, the SIFI designation was challenged as “arbitrary and capricious” in federal court and the federal judge ruled that the governments’ designation process did not pass muster. The Treasury Department in 2016 under President Obama appealed the ruling, which is still pending before an appeals court.7

What This Means

The February 28, 2017 Congressional report from the House Financial Services Committee asserts that the FSOC has ignored its own rules and guidance and has been inconsistent in how it assesses various firms. As a result, some were tested against one set of standards, while others were treated differently, so leading to an opaque and confusing process.8 On March 2, the Council reviewed the designation process at its first quarterly meeting with Secretary Mnuchin as the Chair. During the meeting, the Council received an update on global and market developments. They also received an update on initial staff work on the 2017 annual report. In addition, the ongoing annual reevaluation of the non-bank SIFI designation was discussed, including the review of materials submitted by those companies.9

Next Steps

The full minutes of the March 2, 2017 FSOC meeting should be generally approved at the subsequent meeting, scheduled for June, and then posted online soon afterwards. FSOC meetings are mandated to be quarterly, but Treasury Secretary Mnuchin could call a meeting prior to the scheduled quarterly session.10

On March 31, Republicans on the Senate Banking Committee, in a letter signed by Senators, Tim Scott (R-SC), Tom Cotton (R-AR), Pat Toomey (R-PA), Richard Shelby (R-AL), Mike Crapo (R-ID), Mike Rounds (R-SD), John Kennedy (R-LA), Ben Sasse (R-NE), David Perdue (R-GA), and Thom Tillis (R-NC), urged Treasury Secretary Steve Mnuchin to pursue an end to the FSOC’s ability to designate SIFIs, and stop future bank bailouts.11 The Republican senators stated in the letter that, “We write in strong support of President Trump’s Executive Order setting core principles for regulating the United States financial system …”.12 The senators wrote that, “The FSOC’s process for designating non-bank systemically important financial institutions lacks transparency and accountability, insufficiently tracks data, and does not have a consistent methodology for determinations.”13 And so, they strongly encouraged Secretary Mnuchin to use all available tools to end “to big to fail” of non-bank institutions.

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